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MP1/GW2/sbf/ek4 5/2/2014



BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

Application of California-American Water
Company (U210W) for Approval of the
Monterey Peninsula Water Supply Project
and Authorization to Recover All Present
and Future Costs in Rates.


Application 12-04-019
(Filed April 23, 2012)


ASSIGNED COMMISSIONER RULING, JOINED BY A CO-ASSIGNED
ADMINISTRATIVE LAW JUDGE, REQUESTING COMMENTS
ON SURCHARGE OPTIONS AND PROPOSALS
1. Summary
This Assigned Commissioner Ruling, joined by a co-assigned
Administrative Law Judge, requests comments of the Parties by May 12, 2014,
and reply comments by May 16, 2014, concerning a specific surcharge proposal
prepared by the Division of Water and Audits that is set out in this ruling at
Appendix 1. The proposal would have Surcharge 2 set at 15% starting July 1,
2014, 30% when Surcharge 1 expires (estimated to be by November 1, 2014), and
45% on January , 2015, where it would remain until the desal plant is put into
service.
2. Discussion
1
2.1. Settlement Agreement

1
Portions of this ruling rely heavily on language contained in filings of the parties and
documents prepared by the Division of Water and Audits (DWA).
FILED
5-02-14
12:14 PM
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On July 31, 2013, the following was executed: Settlement Agreement of
California-American Water Company, Citizens for Public Water, City of
Pacific Grove, Coalition of Peninsula Businesses, County of Monterey, Division
of Ratepayer Advocates, LandWatch Monterey County, Monterey County
Farm Bureau, Monterey County WaterResources Agency, Monterey Peninsula
Regional Water Authority, Monterey Peninsula Water Management District,
Monterey Regional Water Pollution Control Agency, Planning and Conservation
League Foundation, Salinas Valley Water Coalition, Sierra Club, and Surfrider
Foundation (Settlement Agreement). It is Attachment A to the Settling Parties
Motion to Approve Settlement Agreement, filed in Application 12-04-019 on
July 31, 2013. All parties to the Settlement Agreement have signed onto in this
Joint Motion except LandWatch Monterey County, Monterey County Farm
Bureau, Monterey Regional Water Pollution Control Agency, Salinas Valley
Water Coalition, Sierra Club, and Surfrider Foundation, who stated they are not
joining in this motion because it goes beyond the scope of their involvement in
the proceeding.
2.2. Surcharge Background
See Appendix 3.
2.3. Joint Motion and Its Denial
On March 14, 2014, California-American Water Company (Cal Am),
Citizens for Public Water, City of Pacific Grove, Coalition of Peninsula
Businesses, County of Monterey, Monterey County Water Resources Agency,
Monterey Peninsula Regional Water Authority, Monterey Peninsula Water
Management District, the Office of Ratepayer Advocates, and Planning and
Conservation League Foundation filed a Joint Motion to Reduce the Special
Request I Surcharge. Assigned Administrative Law Judge (ALJ) Weatherford
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denied that motion without prejudice by an e-mail ruling
2
on March 20, 2014,
stating:
The Joint Motion filed on Friday March 14, 2014, seeking a
reduction in Surcharge I, is denied without prejudice. I will
be consulting with staff concerning ratepayer impacts and
surcharge mechanisms generally and longer term relative to
this proceeding.
2.4. Division of Water and Audits Options and Proposals
After ALJ Weatherford conferred with staff, DWA developed the
surcharge options and proposals attached to this ruling as Appendix 1.
The essential factors taken into account by the staff are these. According to
the large settlement (at 23), Surcharge 2 is estimated to collect $71.5 million
(which is not the capped amount and the capped amount will be treated as
Contributions of Aid of Construction (CIAC)). The parties agreed to increase the
rate of collection of Surcharge 1 to 20% when the certificate of public convenience
and necessity (CPCN) would be issued to make for a smooth transition. Cal
Am's fixed equity investment of the project is capped at 27% of the value of the
total project costs for the desal plant and the CAW-only facilities. Costs of
implementing the securitization plan may be collected through Surcharge 2 in
addition to the $71.5 million for the plant and CAW-only facilities.
The DWA has calculated that letting Surcharge 1 expire naturally and
implementing Surcharge 2 thereafter provides the least fluctuation in customer
bills, increases the rate payer portion of the Monterey Peninsula Water Supply
Project (MPWSP), and decreases the total impact of the project on the rate payer
by increasing CIAC. Setting Surcharge 2 at 15% starting July 1, 2014, 30% when

2
By this reference that informal ruling is confirmed and memorialized.
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Surcharge 1 expires (estimated to be by November 1, 2014), and 45% on
January 1, 2015, where it would remain until the desal plant is put into service,
accomplishes these goals.
In addition to the MPWSP, rates will increase around the 2nd quarter 2015
for the GRC and around the 3rd quarter for the Water Rate Adjustment
Mechanism, assuming a timely processing of the advice letter.
Commission precedence for surcharge collection of construction costs in
advance of construction can be found in Decision (D.) 12-06-040 (San Clemente
Dam) and D.11-05-002 (Klamath River Dams removal).
This Assigned Commissioner Ruling seeks comments of the Parties by
May 12, 2014, and reply comments by May 16, 2014, on the DWA options and
proposals set out in Appendix 1
IT IS RULED that Parties are requested to file and serve comments on the
Division of Water and Audits options and proposals contained in Appendix 1 by
May 12, 2014, and file and serve reply comments by May 16, 2014.
Dated May 2, 2014, at San Francisco, California.




Michael R. Peevey
Assigned Commissioner
Gary Weatherford
Co-Assigned
Administrative Law Judge
/s/ MICHAEL R. PEEVEY
/s/ GARY WEATHERFORD
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Appendix 1
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Appendix 1
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(End of Appendix 1)
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Appendix 2
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Excerpt from Joint Motion
(Footnotes deleted)
California-American Water Company (California American Water), Citizens for Public
Water, City of Pacific Grove, Coalition of Peninsula Businesses, County of Monterey, Monterey
County Water Resources Agency, Monterey Peninsula Regional Water Authority, Monterey
Peninsula Water Management District, the Office of Ratepayer Advocates, and Planning and
Conservation League Foundation (collectively, the Settling Parties) file this joint motion to
reduce the Special Request 1 Surcharge (Surcharge 1). Specifically, the Settling Parties seek
authority for California American Water to reduce the amount of Surcharge 1 from 15% to 4.5%
of customer bills. This reduction is reasonable in light of the new Commission schedule for the
proposed Monterey Peninsula Water Supply Project (MPWSP). The reduction will also benefit
ratepayers by avoiding an unnecessary fluctuation in rates and by reducing current bills.
Additionally, parties have agreed that California American Water will not seek recovery of any
additional costs through Surcharge 1 beyond those requests currently pending before the
Commission in A.12-10-003 and A.13-05-017. The Settling Parties request that the Commission
act as soon as possible to authorize this agreement and the corresponding reduction in Surcharge
1 in order to maximize the benefit to customers.
II. Legal and Factual Background
In D.03-09-022, the Commission authorized California American Water to track
preconstruction costs related to a long-term water supply project in a memorandum account. In
D.06-12-040, the Commission authorized California American Water to recover via Surcharge 1
the long-term water supply project costs that it was tracking in that memorandum account. The
Commission also approved the Special Request 2 Surcharge (Surcharge 2), which would fund
the construction of a water supply solution on a pay-as-you-go basis, but delayed implementation
of Surcharge 2 until the issuance of a Certificate of Public Convenience and Necessity (CPCN)
for a long-term water supply project.
In D.11-09-039, the Commission authorized California American Water to
increase Surcharge 1 to 15%. The increase was approved based on a schedule that provided for
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amortization of the approximately $30 million in preconstruction costs booked in the
memorandum account by the end of 2014.
In the current application for the MPWSP, California American Water proposed to
continue using Surcharge 1 at the 15% rate to recover preconstruction costs, and asked the
Commission to reinstate Surcharge 2. As part of the July 31, 2013 Settlement Agreement, the
parties agreed that Surcharge 1 will cease before Surcharge 2 collections begin, allowing for a
more gradual ramping up of rates that are directly attributed to the MPWSP. The parties also
agreed that the total to be collected under Surcharge 2 will be reduced in order to provide for a
smooth transition in rates from the final period under Surcharge 2 to the year 1 revenue
requirement of the desalination plant.
III. Justification For Relief
In its application, California American Water proposed a schedule that would provide a
Commission decision on the CPCN by February 2013. That schedule was rejected, and an
extended procedural schedule was adopted. Most recently, on January 27, 2014, assigned
Administrative Law Judge Minkin extended the current schedule for the proceeding to
accommodate a delay in the environmental review process. Under the new schedule, a
Commission decision on the MPWSP is not expected until the first quarter of 2015. In the
meantime, California American Water will continue to recover preconstruction costs through
Surcharge 1.
With the current 15% rate, California American Water expects to have recovered the
costs through Surcharge 1 by Fall 2014. The extended procedural schedule, however, allows
California American Water to be less aggressive in recovery of preconstruction costs and
justifies reducing Surcharge 1 to 4.5%. As shown in the attached schedule (Attachment 1), this
will still allow California American Water to recover the preconstruction costs in a timely
manner and will also smooth rate reductions during the transition from Surcharge 1 to Surcharge
2. Moreover, this reduction will benefit California American Waters Monterey County District
customers by reducing current bills. This relief will be helpful for all California American Water
customers, but will particularly assist low-income customers facing a variety of increases.
Furthermore, the parties have agreed that California American Water will not seek recovery of
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any additional costs through Surcharge 1 beyond those requests currently pending before the
Commission in A.12-10-003 and A.13-05-017.
IV. Request For Timely Action
The Settling Parties request that the Commission act as soon as possible to authorize the
reduction of Surcharge 1. The sooner Surcharge 1 is reduced, the greater the benefit for
California American Waters customers. Furthermore, since California American Water is
currently on track to recover the existing preconstruction costs by Fall 2014 under the 15% rate,
a significant delay would render the issue moot. Timely action on this motion will serve the
public interest.
V. Conclusion
Given the delay in the proceeding and the extended period for recovery of preconstruction costs,
the Settling Parties request to reduce Surcharge 1 from 15% to 4.5% of customer bills is
justified. California American Water will still be able to recover costs in a timely manner, but
customers will benefit in the meantime from a reduced surcharge on their California-American
Water Company (California American Water), Citizens for Public Water, City of Pacific Grove,
Coalition of Peninsula Businesses, County of Monterey, Monterey County Water Resources
Agency, Monterey Peninsula Regional Water Authority, Monterey Peninsula Water
Management District, the Office of Ratepayer Advocates, and Planning and Conservation
League Foundation (collectively, the Settling Parties) file this joint motion to reduce the Special
Request 1 Surcharge (Surcharge 1). Specifically, the Settling Parties seek authority for
California American Water to reduce the amount of Surcharge 1 from 15% to 4.5% of customer
bills. This reduction is reasonable in light of the new Commission schedule for the proposed
Monterey Peninsula Water Supply Project (MPWSP). The reduction will also benefit ratepayers
by avoiding an unnecessary fluctuation in rates and by reducing current bills. Additionally,
parties have agreed that California American Water will not seek recovery of any additional
costs through Surcharge 1 beyond those requests currently pending before the Commission in
Application (A.) 12-10-003 and A.13-05-017. The Settling Parties request that the Commission
act as soon as possible to authorize this agreement and the corresponding reduction in Surcharge
1 in order to maximize the benefit to customers.
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II. Legal And Factual Background
In D.03-09-022, the Commission authorized California American Water to track
preconstruction costs related to a long-term water supply project in a memorandum account. In
D.06-12-040, the Commission authorized California American Water to recover via Surcharge 1
the long-term water supply project costs that it was tracking in that memorandum account. The
Commission also approved the Special Request 2 Surcharge (Surcharge 2), which would fund
the construction of a water supply solution on a pay-as-you-go basis, but delayed implementation
of Surcharge 2 until the issuance of a Certificate of Public Convenience and Necessity (CPCN)
for a long-term water supply project.
In D.11-09-039, the Commission authorized California American Water to increase
Surcharge 1 to 15%. The increase was approved based on a schedule that provided for
amortization of the approximately $30 million in preconstruction costs booked in the
memorandum account by the end of 2014.
In the current application for the MPWSP, California American Water proposed to
continue using Surcharge 1 at the 15% rate to recover preconstruction costs, and asked the
Commission to reinstate Surcharge 2. As part of the July 31, 2013 Settlement Agreement, the
parties agreed that Surcharge 1 will cease before Surcharge 2 collections begin, allowing for a
more gradual ramping up of rates that are directly attributed to the MPWSP. The parties also
agreed that the total to be collected under Surcharge 2 will be reduced in order to provide for a
smooth transition in rates from the final period under Surcharge 2 to the year 1 revenue
requirement of the desalination plant.
III. Justification For Relief
In its application, California American Water proposed a schedule that would provide a
Commission decision on the CPCN by February 2013. That schedule was rejected, and an
extended procedural schedule was adopted. Most recently, on January 27, 2014, assigned
Administrative Law Judge Minkin extended the current schedule for the proceeding to
accommodate a delay in the environmental review process. Under the new schedule, a
Commission decision on the MPWSP is not expected until the first quarter of 2015. In the
meantime, California American Water will continue to recover preconstruction costs through
Surcharge 1.
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With the current 15% rate, California American Water expects to have recovered the
costs through Surcharge 1 by Fall 2014. The extended procedural schedule, however, allows
California American Water to be less aggressive in recovery of preconstruction costs and
justifies reducing Surcharge 1 to 4.5%. As shown in the attached schedule (Attachment 1), this
will still allow California American Water to recover the preconstruction costs in a timely
manner and will also smooth rate reductions during the transition from Surcharge 1 to Surcharge
2. Moreover, this reduction will benefit California American Waters Monterey County District
customers by reducing current bills. This relief will be helpful for all California American Water
customers, but will particularly assist low-income customers facing a variety of increases.
Furthermore, the parties have agreed that California American Water will not seek recovery of
any additional costs through Surcharge 1 beyond those requests currently pending before the
Commission in A.12-10-003 and A.13-05-017.
IV. Request For Timely Action
The Settling Parties request that the Commission act as soon as possible to authorize the
reduction of Surcharge 1. The sooner Surcharge 1 is reduced, the greater the benefit for
California American Waters customers. Furthermore, since California American Water is
currently on track to recover the existing preconstruction costs by Fall 2014 under the 15% rate,
a significant delay would render the issue moot. Timely action on this motion will serve the
public interest.
V. Conclusion
Given the delay in the proceeding and the extended period for recovery of
preconstruction costs, the Settling Parties request to reduce Surcharge 1 from 15% to 4.5% of
customer bills is justified. California American Water will still be able to recover costs in a
timely manner, but customers will benefit in the meantime from a reduced surcharge on their
bills. The Settling Parties urge the Commission to authorize the reduction of Surcharge 1 as soon
as possible in order to provide the greatest benefit to its customers.
(End of Appendix 2)
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Appendix 3
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Excerpt from Application
(Footnotes deleted)
V. MODIFICATIONS OF EXISTING RATEMAKING MECHANISMS
California American Water is requesting that the Commission: (1) subcategorize the
types of costs tracked in the existing memorandum account, (2) reinstitute Surcharge 2 with
modifications, (3) adopt a cost cap similar to the one approved in D.10-12-016, and (4) continue
the previously authorized ratemaking treatment for the California American Water-only
facilities.
A. Memorandum Account
For several years, California American Water has been tracking costs related to a
long-term water supply solution for Monterey in a Commission-authorized memorandum
account and filing an annual application for review and recovery of the tracked costs. California
American Water recovers the reviewed and approved costs through Surcharge 1, which the
Commission approved in D.06-12-040. California American Water proposes to continue this
process, but to subdivide the various categories of costs. In order to avoid delay, California
American Water requests that the Commission issue an interim decision addressing this
particular proposal. Subcategory 1A will consist of costs related to the Regional Desalination
Project that California American Water incurred before the projects demise, as well as the costs
to unwind the Regional Desalination Project and related agreements. California American
Water proposes to recover these costs through the existing annual application process established
in D.08-12-034. California American Water will recover these costs through Surcharge 1A.
Subcategory 1B will consist of costs related to the Monterey Peninsula Water Supply
Project, including costs related to a test well and other pre-construction costs. California
American Water seeks to use the existing annual review process for review and recovery of the
test well and other pre-construction costs related to the Monterey Peninsula Water Supply
Project. California American Water will recover these costs through Surcharge 1B.
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It is particularly important that the Commission issue an interim decision addressing the
ability to track costs related to the test well and recover them in rates. Data from this well will
assist with the design of the Monterey Peninsula Water Supply Project, will assess the individual
well capacities to determine the final number of intake wells needed, and will help assess the
levels of salinity. California American Water seeks to proceed with the test well as soon as
possible.
The current estimated cost of the test well is $5 million. Although California American
Water believes that the Commissions earlier decisions authorize it to track and recover costs
related to any long-term water supply solution, it is concerned parties may attempt to prevent
recovery of the test well and related pre-construction costs as a way to derail the Monterey
Peninsula Water Supply Project. Therefore, California American Water requests that the
Commission issue an interim decision authorizing California American Water to track the costs
for the test well for the Monterey Peninsula Water Supply Project, as well as all other
preconstruction costs for the Project, in subcategory B of the memorandum account.
An interim decision will allow California American Water to proceed with these crucial
activities and avoid delay. Although California American Water believes this application, along
with appendices and supporting testimony, provides sufficient information to rule on its request
for interim relief, if after protests and responses to the application are filed the assigned
Administrative Law Judge requires more information, California American Water recommends
that the parties to this proceeding file concurrent pleadings on the issue, in accordance with the
schedule provided below.
B. Surcharge 2
Surcharge 1 provides recovery of preconstruction costs. The Commission approved
Surcharge 2 in D.06-12-040 to fund construction costs on a pay-as-you-go basis.27
In D.06-12-040, the Commission authorized California American Water to implement
Surcharge 2 immediately after the Commission issued a CPCN for the Coastal Water Project or
an alternative long-term supply solution. Initially, the surcharge was to be 15% on customer
bills, increasing to 30%, 45% and 60%, respectively, on July 1 and January 1 each year, and was
to remain at the 60% level through completion of the approved long-term water supply project.
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In D.10-12-016, the Commission found that Surcharge 2 was no longer applicable
because the Regional Desalination Project would be financed by the public agencies.29
However, Surcharge 2 is necessary to avoid rate shock and reduces the overall cost of the
project to customers. Now that California American Water will be financing and owning the
facilities, reinstatement of Surcharge 2, with a few modifications, is appropriate. For example,
while Surcharge 2 should still commence immediately after issuance of a CPCN, the surcharge
should be 30% initially, increase to 45% and 60% on the subsequent July 1 and January 1, and
the remain at the 60% level through completion of the Monterey Peninsula Water Supply
Project. Based on the $260 million capital cost for the 9.0 mgd plant, Surcharge 2 will collect
38% of the capital costs. Based on the $213 million capital cost for the 5.4 mgd plant, the
surcharge will collect 47% of the capital costs. On May 15 of each year after approval, California
American Water will file an advice letter to adjust the rate downward if it estimates that the
surcharge collection will cover more than those percentages of project costs, effective July 1 of
that year. Surcharge 2 should remain in place until the Monterey Peninsula Water Supply Project
is in service. California American Water will track the surcharge collections in a memorandum
account. Since the surcharge collections will offset costs, those costs should therefore not be
included in the capitalized costs and the surcharge collections should not be included as
contributions.
C. Desalination Facility Cost Cap
In D.10-12-016, the Commission approved an overall cost cap for the Regional
Desalination Project, but provided for review and recovery of reasonable cost above the cap,
upon a showing that these costs were the result of extraordinary circumstances and subject to a
heightened level of scrutiny. California American Water requests that the Commission take the
same approach to a cost cap for the Monterey Peninsula Water Supply Project. This would create
an incentive for California American Water to manage the Project responsibly, since the
Commission could easily disallow unreasonable costs, but would avoid unfairly penalizing
California American Water for increased costs beyond its control. Although California American
Water is confident that its cost estimates are accurate based on the information currently
available, a number of factors beyond California American Waters control could still affect the
cost estimate, including escalating costs of labor and materials, actions mandated by other
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regulatory agencies, and other project unknowns. California American Water requests that the
Commission adopt a $281.2 cost cap for the 9.0 mgd facility and a $227.1 cost cap for the 5.4
mgd facility. The cost caps include the estimated capital expenditures, capitalized operating
expenses, and allowance for funds used during construction (AFUDC).
D. California American Water-Only Facilities
In D.10-12-016, the Commission approved with minor modification to the requested
interest rate, the exact request made by the settling parties with respect to the California
American Water-only facilities. The Commission established a $106.875 cost cap for the
California American Water facilities, with recovery of costs above the cap upon a showing of
extraordinary circumstances and subject to heightened scrutiny. The Commission approved
treatment of the California American Water-only facilities as used and useful as soon as they are
constructed, even if the Regional Desalination Project was delayed. With the exception of the
Transfer Pipeline, California American Water was to record the total cost of the California
American Water-only facilities, subject to the capital cost cap and AFUDC calculation, that are
completed and used to provide service to customers in its Utility Plant In Service (UPIS)
Account and the total costs of the projects that are not providing service to customers in the
Construction Work in Progress (CWIP) Account. Under D.10-12-016, the ratebase for the
California American Water-only facilities was to be calculated by determining the sum of UPIS
and CWIP, less any grant funds and less any accumulated depreciation.
The Commission authorized California American Water to file a Tier 2 advice letter on
May 15 and November 15 each year to include all prudently expended costs related to
construction of the California American Water-only facilities into rate base as either CWIP or
UPIS, with the increase in January 1, or July 1 regardless of the status of the review. The
Commission authorized California American Water to earn AFUDC on all project costs until
they were in ratebase and found that it was appropriate to adopt an initial AFUDC rate that is
representative of current rates, and allow this rate to be trued-up to reflect actual carrying costs.
California American Water requests that the Commission adopt the same treatment for
the California American Water-only facilities in this proceeding that it approved in D.10-12-016,
with clarifications to the process set forth in the Direct Testimony of David P. Stephenson.
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Generally, however, since the California American Water-only facilities will be the same as the
Commission approved in D.10-12-016, there is no reason to change the ratemaking treatment.
(End of Appendix 3)